The Office of the Comptroller of the Currency (OCC) closed City National Bank of New Jersey on Friday, November 1st. This is just the fourth bank to fail in 2019. It came as a surprise to me since two banks had failed just the week before. Bank failures have become rare since 2017. There were no bank failures in all of 2018. Only eight banks failed in 2017. According to the FDIC press release on this bank failure:
On average, there are five bank failures each year in non-crisis times, according to FDIC data. There have been only three years since 1933 without a single bank failure.
It’s interesting to note that the FDIC slightly change this statistic from the previous week when the statistic read “On average, roughly five banks go out of business each year according to FDIC data.” It is true that many more than 5 banks a year should be expected to fail during and soon after a financial crisis period. The yearly number of bank failures increased dramatically in the last financial crisis, rising from 25 in 2008 to 140 in 2009. The number reached a peak of 157 in 2010.
The last part of the FDIC statistic remained the same: there have been only three years since 1933 without a single bank failure. Those three years have occurred during the time while I’ve been covering bank failures, 2018, 2006 and 2005.
The November 1st bank failure was typical. The FDIC was able to find another bank to assume all deposits.
According to this FDIC press release, “City National had approximately $120.6 million in total assets and $111.2 million in total deposits. In addition to assuming all of the deposits of the failed bank, Industrial Bank agreed to purchase essentially all of its assets.”
All deposits of the failed bank, even those above the FDIC limits, were transferred to the new bank as described in the FDIC’s FAQs:
No one lost any money on deposit as a result of the closure of this bank. All deposits, regardless of dollar amount, were transferred to Industrial Bank.
Both insured and uninsured deposits were transferred to Industrial Bank. Thus, even depositors who had over the insurance limits had no loss in these failures.
Occasionally, banks fail and uninsured deposits are not covered. That happened this year in the first 2019 bank failure. In that case, the acquiring bank only agreed to assume insured deposits. Depositors who had over the insurance limits were at risk of losing some or all of their uninsured deposits. In previous years, banks have also failed without an acquiring bank. In those cases, the FDIC liquidates the bank and sends checks to depositors of only their insured deposits.
For the November 1st bank failure, the only concern for depositors of the failed bank are those with CDs that had high rates. Those high rates may not last as the FDIC describes in its FAQs:
Interest on deposits accrued through close of business on Friday, November 1, 2019, will be paid at your same rate. City National’s rates will be reviewed by Industrial Bank and may be lowered; however, you will be notified in writing of any changes. You may withdraw funds from any transferred account, regardless of whether your interest rate changes, without early withdrawal penalty until you enter into a new deposit agreement with Industrial Bank.
Cause of the Failure
DepositAccounts.com had given City National Bank of New Jersey a “C” grade on its financial health based on data from its June 30, 2019 call reports. Its Texas Ratio of 36% wasn’t terrible. Typically, banks most at risk have a Texas Ratio near or greater than 100%. One thing to note about City National Bank is that the OCC had issued a Prompt Corrective Action (PCA) Directive last June which designated the bank as undercapitalized. This came after a 2018 Consent Order which required the bank to improve its capitalization. This was one of only two banks that were under PCA Directives, based on CalculatedRisk’s unofficial list of October problem banks. The other one on the list, Fort Gibson State Bank, was acquired without FDIC help by Firstar Bank.
The failure of City National Bank differed from the first bank that failed in 2019 and the last bank to fail in 2017. In both of those cases, fraud was the primary cause of the failures. Due to the fraud, the financial health grades didn’t help predict the failures. Also, the fraud caused the acquiring banks to decide to only assume the insured deposits. Customers at those banks with uninsured deposits were at risk of losing those deposits.
Those previous two bank failures were an important reminder why everyone should make sure that their deposits (total of both principal and interest) are kept below the FDIC and NCUA insurance limits at each of their banks and credit unions.
Credit Union Liquidations and Conservatorships
There have been no new credit union liquidations or conservatorships since my report on the two October bank failures. One credit union was liquidated in March, and two credit unions were placed into conservatorship in April and May. In a conservatorship, the NCUA takes over the management of the credit union with the goal of resolving the issues. If the issues cannot be resolved, the NCUA will either arrange for a merger of the conserved credit union into a healthy credit union or liquidate the credit union.